IZA DP No. 2886 Was Weber Wrong? A Human Capital Theory of Protestant Economic History Sascha O. Becker Ludger Woessmann DISCUSSION PAPER SERIES DISCUSSION PAPER June 2007 Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor Was Weber Wrong? A Human Capital Theory of Protestant Economic History Sascha O. Becker CES, University of Munich and IZA Ludger Woessmann University of Munich, Ifo Institute, CESifo and IZA Discussion Paper No. 2886 June 2007 IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 E-mail: [email protected] Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 2886 June 2007 ABSTRACT Was Weber Wrong? A Human Capital Theory of Protestant Economic History* Max Weber attributed the higher economic prosperity of Protestant regions to a Protestant work ethic. We provide an alternative theory, where Protestant economies prospered because instruction in reading the Bible generated the human capital crucial to economic prosperity. County-level data from late 19th-century Prussia reveal that Protestantism was indeed associated not only with higher economic prosperity, but also with better education. We find that Protestants’ higher literacy can account for the whole gap in economic prosperity. Results hold when we exploit the initial concentric dispersion of the Reformation to use distance to Wittenberg as an instrument for Protestantism. JEL Classification: N33, Z12, I20 Keywords: human capital, Protestantism, economic history Corresponding author: Ludger Woessmann CESifo Poschingerstr. 5 81679 Munich Germany E-mail: [email protected] * The idea that the rise of Protestantism may have fostered human capital accumulation in Europe stems from our discussions with Paul E. Peterson, who again traces the idea back to a late-1960s University of Chicago seminar by C. Arnold Anderson and Mary Jean Bowman. We have received substantive comments during seminar presentations at Ifo Institute Munich, Aarhus Business School, ZEW Mannheim, the theology and economics faculties of the University of Munich, the University of Zurich, the Third Christmas Conference of German Expatriate Economists, WZB Berlin, the Max Planck Institute for Research in Collective Goods in Bonn, and the Universities of Florence, Rome “Tor Vergata”, Harvard, Stockholm, Stanford, and UC Davis. Discussions with and comments from Andreas Ammermüller, Knut Borchardt, David Card, Andreas Diekmann, Guido Friebel, Claudia Goldin, Avner Greif, Mathias Hoffmann, Tim Lorentzen, Volker Meier, Paul Peterson, Holger Sieg, and Ulrich Woitek were very fruitful. Support has come from the Program on Education Policy and Governance of Harvard University. Erik Hornung and Martin Hofmann provided capable research assistance. We are grateful to all of them. I. Introduction In the century since Max Weber [1904/05] (2001) suggested in The Protestant Ethic and the Spirit of Capitalism that a “Protestant ethic” was instrumental for economic progress, several interpretations have emerged how the greater economic affluence of Protestants relative to Catholics might have come about (if at all). Weber’s seminal work is considered a key founding stone of sociology, and leading mechanisms emphasized in sociological interpretations include that Protestants’ specific ethic may have induced them to work harder and to save more. To the sociological theories, we offer a simple alternative economic theory based on the standard human capital model. We suggest that Luther’s demand that all Christians should be able to read the Gospel by themselves led to increased literacy among Protestants which, incidentally, could then also be used in economic activities. In order to test empirically which of the suggested mechanisms may be right or wrong, we go on to present county-level evidence from the very perspective that Weber had, namely Weber’s native Prussia as the main part of the German Empire in late 19th century. The evidence reveals that there is indeed a significant positive association between Protestantism and economic success. We then show that there is also a significant positive association between Protestantism and literacy. Intriguingly, after controlling for the positive effect of literacy on economic success, there remains no significant difference in economic success between Protestant and Catholic counties. Human capital can account for the whole denominational difference in economic affluence, leaving little scope for any denomination-based work ethic. Furthermore, we argue that the approximately concentric diffusion of Protestantism around Luther’s city of Wittenberg in Lutheran times allows us to identify exogenous variation in Protestantism in late 19th century. We find that even when instrumented by distance to Wittenberg, a county’s share of Protestants increases literacy, which in turn yields higher economic progressiveness. The results suggest that while religious affiliation may indeed have had economic consequences, this may have been for reasons unrelated to any ethical disposition. It is well known that Luther opposed the Roman Catholic practice of reading out the Gospel in the scholarly language of Latin, and that he delivered the first influential translation of the Bible into his native German, for everybody to read. What is less well known today is that he also explicitly favored universal schooling, for the simple reason that people had to be literate in order to be able to read God’s Word, the Bible. In light of human capital theory, the ensuing literacy has the unintended side effect in the economic realm to increase people’s productivity and thus prosperity. In this view, religion in the form of Protestant denomination may well be associated with economic affluence, but not because of 1 any difference in work ethic, but rather incidentally because it furthered the creation of human capital. In the next section, we introduce this effect into a simple model of human capital.1 To study the relationship between Protestantism, education, and economic prosperity empirically, 19th century Prussia is the natural place to look at. The birthplace of Martin Luther is on 1871 Prussian territory, where the Reformation was initiated and where his doctrine diffused in its purest form. Prussia is also Max Weber’s birthplace, and the situation in late 19th century is the one he had in mind when formulating his thesis. The core of Prussia is a well-defined region with rather uniform laws and institutional settings, so that empirical investigation is not hampered by institutional heterogeneity.2 Prussia is also reasonably well divided between Protestants and Catholics, at roughly two thirds to one third of the population in 1871, so that no denomination constitutes just a small minority, and Prussia had a long tradition of freedom of religion. Finally, the Prussian Statistical Office collected an impressive amount of data, available at the level of 452 counties. It is generally accepted that Prussian orderliness and thoroughness yielded high-quality data even in the 19th century, which are available in archives to these days. Important for our purposes, the 1871 Prussian Census is the first instance surveying literacy of the whole population. We thus do not have to rely on data from selective samples like military recruits, which provide only a limited picture of the population at large. The use of Prussian county data allows us to go beyond the existing empirical literature on the Weber thesis, which mostly uses cross-country variation. Iannaccone (1998) concludes that the empirical literature on the relationship between Protestantism and economic outcomes largely rejects the empirical validity of Weber’s argument. In fact, studies based on cross-country data seem to show no relationship at all between Protestantism and the rise of industrial capitalism. Delacroix and Nielsen (2001) conclude that there is no clear-cut pattern in the adoption of capitalism across European countries in the 19th century with respect to the dominant religion.3 A broader context of papers studies the association between religion and economic outcomes. Quite generally, religion is an important expression of culture (Guiso, Sapienza, and Zingales 2006), and as such is viewed as a possible fundamental cause of economic growth. Thus, Barro and McCleary (2003; 2005) study the association between different religions and economic growth. In a study 1 In a closely related argument, Botticini and Eckstein (2005, 2006) suggest a human capital interpretation of Jewish history, where the ultimate root of Jewish economic prosperity as merchants lies in a centuries-old Judaic rule that required male Jews to be able to read the Torah in the synagogue, and to teach the reading of the Torah to their sons. 2 While this may not hold strictly for recent Prussian annexations, we will show below that all our results hold in an analysis restricted to the core Prussian territory which had been part of Prussia for decades and even centuries. 3 In a growth model calibrated to England, Cavalcanti, Parente, and Zhao (2006) suggest that Protestantism could at best account for only slight delays in the start of industrialization.